What Does "Without Recourse" Mean in the Assignment Area of an Auto Contract?

By Motley Fool StaffFool.com

It is common practice for lenders to sell their loans after closing on them -- and this is especially true when it comes to mortgages and auto loans. If your loan contract has an "assignment without recourse" clause, it means that this could happen to you.

What an "assignment without recourse" clause means to you, the borrowerEssentially, an assignment clause in your auto loan contract means that you are giving the lender permission to either sell or transfer your loan to another finance company.

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Lenders sell loans for a variety of reasons -- for example, many lenders simply act as originators and don't like to hold many outstanding loans on their books. Or if a lender finds itself with too much outstanding auto loan debt, it could decide to sell a portion of its loan portfolio.

Whatever the reason for selling, the "without recourse" part of the clause means that you can no longer hold the initial lender responsible for any errors or other loan-related issues. Upon sale of the loan to a new lender, the borrower's relationship with their original lender is automatically terminated.

The borrower must deal with a new lender for all issues regarding the loan and must make payments to the new lender. The new lender cannot change the loan's terms, such as the interest rate or loan length, but may have different policies in regards to issues like late payments. If your loan does get sold, it's important to thoroughly read any information you receive from the new lender so you're familiar with any changes that may take place.

The bottom line on "without recourse" clausesIf you want an auto loan that will be maintained by a specific lender for the duration of the loan, be sure to thoroughly read your contract (you should be doing this anyway), and make sure there is no "assignment without recourse" clause. If you're not sure if there is or not, this is a question to specifically ask your lender, so you'll know whether or not your loan can be sold without any responsibility remaining on your lender's shoulders.

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